The government-backed rent-to-buy scheme, or “homebuy” was created to enable housing association tenants to purchase a share in a property. Under the scheme, tenants pay an affordable rent (usually up to 80% of market rates) for a fixed term. At the end of the term, they have an option to purchase a share in the house. The scheme usually applies to new-build properties, and there are number of variations of the scheme across the country.
One such version, available at The Room apartments in Preston, enables purchasers to rent a property for 18 months and at the end of that period, to purchase it at a price set at the start. If the tenant decides to purchase, all rents paid during the preceding 18 months are refunded and the monies off-set against any deposit payable.
In addition to the government-backed scheme, there are a number of brokers marrying up tenants with private investors. For investors, the scheme offers a low-risk opportunity with relatively predictable returns.
Investors purchase one or more residential properties with the intention of selling these in the future. The broker links the investor/landlord with a tenant keen to buy the property in due course.
The investor, as landlord, enters into a fixed term tenancy agreement and option with the tenant, giving the tenant the ability (usually obligation free) to purchase the property, at full market value, at the expiry of the agreement.
At the outset, the tenant les machines a sous makes a down payment which goes toward the eventual purchase price. The following payments are also made throughout the course of the agreement:
- Rent
- A premium – payable in conjunction with the rent. These monies, as they accrue, are added to the down payment and factored into the purchase price
The purchase price or the means of calculating the purchase price of the property is usually agreed at the outset. This may be a simple fixed price, or an appreciation model, with percentage increases applied during each year. The fixed terms tend to last 2 – 3 years.
At the conclusion of the fixed term, the landlord applies the down payment and premium to the purchase price and the tenant exercises the option to purchase.
The benefits to the tenant of this type of arrangement are:
- The ability to purchase a property sooner than would otherwise be possible
- The ability to move immediately into a property they will one day own
The benefits to the investor of this type of arrangement are:
- A (virtually) guaranteed purchaser at an agreed date in the future, with a known and agreed sale price or calculation method, and therefore return on investment
- A steady flow of cash throughout the course of the fixed term
- No liability for repair or maintenance costs as these are generally borne by the tenant from the outset (subject to the terms of the tenancy agreement)
For more information about rent-to-buy schemes please contact Joanna Norris, our property specialist on 0161 209 3763. Alternatively drop Joanna an email: joanna.norris@ratiolaw.co.uk
Homebuy link: http://www.homebuy.co.uk/rent_to_homebuy.aspx
The Room link: http://www.theroomapartments.com/rent_to_buy/